ILIT Crummey Letter 2026 Calculator

An Irrevocable Life Insurance Trust (ILIT) is a grantor-funded trust that owns and is beneficiary of a life-insurance policy on the grantor's life. Because the grantor holds no "incidents of ownership" under IRC §2042, the death benefit passes to heirs outside the taxable estate. To fund premiums tax-free, the grantor uses the IRC §2503(b) annual exclusion — $19,000 per beneficiary in 2026 — combined with a Crummey withdrawal right. Last updated May 2026.

The Crummey Doctrine: Why Withdrawal Rights Matter

Under IRC §2503(b), the annual gift exclusion only applies to present interest gifts. A gift into a trust is normally a future interest (the beneficiary can't access funds today), which would disqualify it. In Crummey v. Commissioner (397 F.2d 82, 9th Cir. 1968), the court ruled that giving each beneficiary a temporary withdrawal right — typically 30 days — converts the gift into a present interest. So each year, the trustee sends every beneficiary a "Crummey letter" notifying them of their right to withdraw their share of the contribution. Almost no beneficiary ever exercises this right, but the right itself qualifies the gift for the annual exclusion.

2026 Numbers: How Much Can You Gift

2026 annual exclusion = $19,000 per beneficiary (IRS Rev. Proc. 2025-32). With gift-splitting (married grantor + spouse both consent on Form 709), the limit doubles to $38,000 per beneficiary. A family with 4 Crummey beneficiaries (2 kids, 2 grandkids) using gift-splitting can move $152,000/year into the ILIT tax-free, more than enough for a $5M-$10M death benefit policy. Anything over the annual exclusion uses the $13.99M lifetime gift/estate exemption.

The 5-and-5 Power Lapse Trap

When a Crummey beneficiary's withdrawal right lapses without being exercised, the lapse is technically a "gift" from the beneficiary back to the trust under IRC §2514(e). To avoid this tax trap, the Code provides a 5-and-5 safe harbor: each beneficiary's lapsed power is excluded from gift tax up to the greater of $5,000 or 5% of the trust corpus per year. ILITs are typically drafted so the withdrawal right is capped at the 5-and-5 amount, or uses a "hanging power" or "vested testamentary power" technique to defer the lapse. Coordination with an estate-planning attorney is essential — these are technical drafting issues that the IRS examines closely.

Common ILIT Mistakes That Pull Death Benefit Back Into Estate

(1) Three-year lookback (IRC §2035) — if the grantor transfers an existing policy to the ILIT and dies within 3 years, the death benefit returns to the estate. Buy new policies inside the ILIT from day one. (2) Paying premiums directly — always pay premiums to the ILIT (via Crummey gifts), then have the trustee pay the carrier. Direct payment retains incidents of ownership. (3) Skipping Crummey notices — without contemporaneous written notice, IRS may disallow the annual exclusion. Trustee must mail letters each year and keep records. (4) Spouse as trustee — only acceptable if the spouse is not a beneficiary with unrestricted withdrawal rights, or HEMS-limited (health, education, maintenance, support).

Sources: IRC §2503(b), §2042, §2514(e), §2035; Crummey v. Commissioner 397 F.2d 82 (9th Cir. 1968); IRS Rev. Proc. 2025-32 (2026 inflation adjustments). Educational only — not tax or legal advice.